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Market Watch

Headline crude prices for the week beginning 1 March 2019 – Brent: US$68/b; WTI: US$60/b

  • Crude oil futures have extended their gains, fuelled by continued adherence to the OPEC+ supply deal and signs that the Chinese economy is stabilising
  • There was a collective sigh of relief, as President Donald Trump promised an ‘epic’ trade deal with China, indicating that progress had been made in trade talks; China’s manufacturing index also rose at its fastest pace since 2012, easing concerns over a global economic slowdown
  • Within OPEC+, Russia deepened its output cuts in March, joining Saudi Arabia and its allies in making big production cuts; Energy Minister Alexander Novak signalled that he was willing to discuss extension of the supply deal after suggesting that they should be allowed to lapse this September
  • Despite OPEC+’s unwavering stance, the US continues to pressure the cartel into lifting crude quotas through President Donald Trump’s Twitter account
  • It was revealed that Saudi Arabia had quietly raised the taxation rate on Saudi Aramco by switching oil benchmarks from the Kingdom’s crude to the more expensive international benchmark Brent in 2017, seen as a means to increase the government’s offtake of national crude revenue
  • Looking ahead, the possibility of a no-deal Brexit by April 12 is looming, and is weighing down on global financial markets, as well as regional and global energy firms
  • American crude production looks to be growing at a slower pace than expected, and there are now reports that some Asian buyers are rejecting US crude shale oil due to impurities like oxygenates present in significant volumes; the contamination makes processing difficult and at least two South Korean refiners have recently rejected shipments of Eagle Ford crude
  • The active US drilling count continues to drop for a sixth consecutive week, with the Baker Hughes index showing that that 8 oil rigs and 2 gas rigged were scrapped for a net loss of 10, bringing the total rig count own to 1006
  • It is likely that crude oil’s bullish run will continue, lifted by a better economic outlook and stable supply situation, although a potentially chaotic Brexit could throw a spanner in the works. Brent should be trading at US$68-70/b and WTI at US$60-62/b 

Headlines of the week

Upstream

  • Abu Dhabi’s ADNOC has awarded exploration rights for the onshore Block 1 to a consortium of two Indian state oil firms – IOC and BPCL – who will have a 35-year lease on the major asset
  • The Ivory Coast will finalising licensing of six oil blocks involving Total and Eni by June 2019 in a bid to raise output from its current level of 70,000 b/d
  • Total’s Brulpadda discovery in South Africa’s deep waters could prove to be more complicated than initially expected, with the billion-barrel reserve asset surrounded by the Agulhas current, one of fastest ocean currents in the world
  • The BHP Group is reportedly considering purchasing JV Bluewater, backed by the Blackstone Group, for US$1.5-2 billion, which would move BHP into deep water Gulf of Mexico exploration after it exited US shale last year
  • The Trump administration’s plans to open up oil and gas exploration in the Arctic and Atlantic has been blocked by a federal judge, complicating plans to auction off drilling rights in Arctic waters later this year
  • Tullow, Total and Eco Atlantic have begun drilling of their second well in Guyana at the Joe prospect, aiming to replicate ExxonMobil’s major success
  • But Guyana’s plans to expand its oil sector is now facing a regulatory standstill, as a no-confidence vote against President David Granger places the energy industry in the middle of a political deadlock
  • Norway’s Equinor has signalled a return to US Gulf exploration, with plans to drill four wells in the Walker Ridge area
  • ConocoPhillips is looking to sell a package of its UK North Sea assets to Chrysaor Holdings, after a sale to Ineos collapsed earlier, to turn its attention to shale exploration in the USA

Midstream & Downstream

  • China’s Hengli Petrochemical Co has reported successful initial operations at its 400 kb/d Dalian refinery, where test-running had begun in December 2018
  • Argentina’s state oil firm YPF will be investing US$2 billion to upgrade its Mendoza and La Plata refineries by adding desulfurisation units to meet increasing fuel and marine fuel standards
  • Saudi Aramco has officially taken control of Saudi Arabian chemicals giant SABIC, purchasing a majority stake from the Kingdom’s sovereign wealth fund for some US$69.1 billion

Natural Gas/LNG

  • China’s Guanghui Energy has signed a 10-year supply deal with Total for 700,000 tons of LNG per year sourced from Total’s global portfolio
  • Shell is aggressively pursuing plans to become the world’s largest power company, offering one of the cheapest power tariffs in the UK through its subsidiary First Utility through a gas/LNG-based structure
  • Eni seems to be having a streak of gas luck, with its Kekra-1 discovery offshore Pakistan reportedly holding multi-trillion cubic feet reserves of natural gas
  • Nigeria LNG is aiming to take FID on the Train 7 of the NLNG project on Bonny Island by October 2019
  • Anadarko and its partners in Mozambique’s Area 1 are ‘very close’ to taking FID on the two-train, 12.88 mtpa LNG project
  • Novatek has secured the first two sales agreements for its Arctic LNG 2 project in Russia, inking deals with Vitol and Repsol for 15-year and 1 million tpa of LNG per year from the facility in the Gydan peninsula

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In 2018, the United States consumed more energy than ever before

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Primary energy consumption in the United States reached a record high of 101.3 quadrillion British thermal units (Btu) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. The increase in 2018 was the largest increase in energy consumption, in both absolute and percentage terms, since 2010.

Consumption of fossil fuels—petroleum, natural gas, and coal—grew by 4% in 2018 and accounted for 80% of U.S. total energy consumption. Natural gas consumption reached a record high, rising by 10% from 2017. This increase in natural gas, along with relatively smaller increases in the consumption of petroleum fuels, renewable energy, and nuclear electric power, more than offset a 4% decline in coal consumption.

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Petroleum consumption in the United States increased to 20.5 million barrels per day (b/d), or 37 quadrillion Btu in 2018, up nearly 500,000 b/d from 2017 and the highest level since 2007. Growth was driven primarily by increased use in the industrial sector, which grew by about 200,000 b/d in 2018. The transportation sector grew by about 140,000 b/d in 2018 as a result of increased demand for fuels such as petroleum diesel and jet fuel.

Natural gas consumption in the United States reached a record high 83.1 billion cubic feet/day (Bcf/d), the equivalent of 31 quadrillion Btu, in 2018. Natural gas use rose across all sectors in 2018, primarily driven by weather-related factors that increased demand for space heating during the winter and for air conditioning during the summer. As more natural gas-fired power plants came online and existing natural gas-fired power plants were used more often, natural gas consumption in the electric power sector increased 15% from 2017 levels to 29.1 Bcf/d. Natural gas consumption also grew in the residential, commercial, and industrial sectors in 2018, increasing 13%, 10%, and 4% compared with 2017 levels, respectively.

Coal consumption in the United States fell to 688 million short tons (13 quadrillion Btu) in 2018, the fifth consecutive year of decline. Almost all of the reduction came from the electric power sector, which fell 4% from 2017 levels. Coal-fired power plants continued to be displaced by newer, more efficient natural gas and renewable power generation sources. In 2018, 12.9 gigawatts (GW) of coal-fired capacity were retired, while 14.6 GW of net natural gas-fired capacity were added.

U.S. fossil fuel energy consumption by sector

Source: U.S. Energy Information Administration, Monthly Energy Review

Renewable energy consumption in the United States reached a record high 11.5 quadrillion Btu in 2018, rising 3% from 2017, largely driven by the addition of new wind and solar power plants. Wind electricity consumption increased by 8% while solar consumption rose 22%. Biomass consumption, primarily in the form of transportation fuels such as fuel ethanol and biodiesel, accounted for 45% of all renewable consumption in 2018, up 1% from 2017 levels. Increases in wind, solar, and biomass consumption were partially offset by a 3% decrease in hydroelectricity consumption.

U.S. energy consumption of selected fuels

Source: U.S. Energy Information Administration, Monthly Energy Review

Nuclear consumption in the United States increased less than 1% compared with 2017 levels but still set a record for electricity generation in 2018. The number of total operable nuclear generating units decreased to 98 in September 2018 when the Oyster Creek Nuclear Generating Station in New Jersey was retired. Annual average nuclear capacity factors, which reflect the use of power plants, were slightly higher at 92.6% in 2018 compared with 92.2% in 2017.

More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

April, 17 2019
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April, 17 2019
A New Frontier for LNG Pricing and Contracts

How’s this for a first? As the world’s demand for LNG continues to grow, the world’s largest LNG supplier (Shell) has inked an innovative new deal with one of the world’s largest LNG buyers (Tokyo Gas), including a coal pricing formula link for the first time in a large-scale LNG contract. It’s a notable change in an industry that has long depended on pricing gas off crude, but could this be a sign of new things to come?

Both parties have named the deal an ‘innovative solution’, with Tokyo Gas hailing it as a ‘further diversification of price indexation’ and Shell calling it a ‘tailored solutions including flexible contract terms under a variety of pricing indices.’ Beneath the rhetoric, the actual nuts and bolts is slightly more mundane. The pricing formula link to coal indexation will only be used for part of the supply, with the remainder priced off the conventional oil & gas-linked indexation ie. Brent and Henry Hub pricing. This makes sense, since Tokyo Gas will be sourcing LNG from Shell’s global portfolio – which includes upcoming projects in Canada and the US Gulf Coast. Neither party provided the split of volumes under each pricing method, meaning that the coal-linked portion could be small, acting as a hedge.

However, it is likely that the push for this came from Tokyo Gas. As one of the world’s largest LNG buyers, Tokyo Gas has been at the forefront of redefining the strict traditions of LNG contracts. Reading between the lines, this deal most likely does not include any destination restriction clauses, a change that Tokyo Gas has been particularly pushing for. With the trajectory for Brent crude prices uncertain – owing to a difficult-to-predict balance between OPEC+ and US shale – creating a third link in the pricing formula might be a good move. Particularly since in Japan, LNG faces off directly with coal in power generation. With the general retreat from nuclear power in the country, the coal-LNG battle will intensify.

What does this mean for the rest of the industry? Could coal-linked contracts become the norm? The industry has been discussing new innovations in LNG contracts at the recent LNG2019 conference in Shanghai, while the influx of new American LNG players hungry to seal deals has unleashed a new sense of flexibility. But will there be takers?

I am not a pricing expert but the answer is maybe. While Tokyo Gas predominantly uses natural gas as its power generation fuel (hence the name), it is competing with other players using cheaper coal-based generation. So in Japan, LNG and coal are direct competitors. This is also true in South Korea and much of Southeast Asia. In the two rising Asian LNG powerhouses, however, the situation is different. In China – on track to become the world’s largest LNG buyer in the next two decades – LNG is rarely used in power generation, consumed instead by residential heating. In India – where LNG imports are also rising sharply – LNG is primarily aimed at petrochemicals and fertiliser. LNG based power generation in China and India could see a surge, of course, but that will take plenty of infrastructure, and time, to build. It is far more likely that their contracts will be based off existing LNG or natural gas benchmarks, several of which are being developed in Asia alone.

If it takes off  the coal-link LNG formula is likely to remain a Asian-based development. But with the huge volumes demanded by countries in this region, that’s still a very big niche. Enough perhaps for the innovation to slowly gain traction elsewhere, next stop -  Europe?

The Shell-Tokyo Gas Deal:

Contract – April 2020-March 2030 (10 Years)

Volume – 500,000 metric tons per year

Source – Shell global portfolio

Pricing – Formula based on coal and oil & gas-linked indexes

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April, 15 2019